A really great summary of what's been ailing the global economy the past few years, but I was ultimately disappointed by his policy recommendations.
WA really great summary of what's been ailing the global economy the past few years, but I was ultimately disappointed by his policy recommendations.
What follows is a summary of the book (mainly for my benefit) (view spoiler)[ Part I makes a case for why the El-Erian feels this book is necessary and gives some background.
Part II tries to give a (recent) historical context to the discussion that follows. I skimmed most of this as, having read the papers regularly these past 8 years, a lot of it was review.
Part III is where the meat arrives. El-Erian details the ten main issues he sees as facing society today.
In Chapter 8, he makes the case that non-central bank policy makers (i.e., elected leaders) shirked their responsibilities, making central banks – wait for it – the only game in town. Central banks managed to prevent the gears of the global economy from becoming jammed, but because of the way their policy instruments operate, this has mainly benefited asset owners, i.e., the very wealthy (as an aside, this chapter also made me appreciate the Bank for International Settlements a lot more). The longer traditional fiscal policy makers (i.e., elected leaders) resist coming up with sustainable solutions for the problems facing their economies, the worse the price that will be paid in terms of financial stability.
In Chapter 9, El-Erian lays down the first of his Ten Big Challenges: Repeatedly inadequate and unbalanced economic expansion, reflecting cyclical/secular/structural headwinds, highlights the extent to which many advanced economies still lack proper growth models.. I would translate this into lay-person speak as, "The US, European countries and Japan don't have sustainable growth models." They all got hooked on an unsustainable growth model that relied on credit growth and leverage, that blew up, and now things are so messed up that it's hard to get political consensus to tackle the issues. Greece and Portugal relied on debt-financed government spending to fuel economic activity. Cyprus, Iceland, Ireland, the UK and the US focused on leverage in financial institutions to fund housing bubbles. China and Korea exploited the wave of globalization and trade to capture more market share and a bunch of other countries rode China's coattails. One way countries are (not) dealing with all of this is to try to manipulate their exchange rates to steal growth from other countries rather than implementing harder structural reforms. This is a zero-sum game though and given the limited success developed countries has had in implementing change, reform fatigue has set in. Places like Greece have fallen back on "extend and pretend" policies, "kicking the can down the road". The fact is, El-Erian argues, we're in a "new normal" situation, brought on by the difficulties of escaping from a liquidity trap and dealing with "balance sheet" recessions (a term that I believe he cribs from Richard C. Koo who authored a book of the same name Balance Sheet Recession: Japan's Struggle with Uncharted Economics and Its Global Implications), as well as changes in productivity trends, lack of infrastructure investment and demographic change. It's pretty rough ya'll. And El-Erian doesn't have much to be optimistic about, saying that all these developments probably mean that the slump is going to go on for even longer. There's also a brief but interesting section about prices. Many central banks have price stability as their stated goal and we've got a problem in the world now where our economists and central bankers don't have a good handle on the way prices are changing. The chapter concludes with a lot of really interesting stuff about emerging market economies having to deal with "tourist" flows of money as investors from developed markets economies park hot money in emerging markets financial systems that are not deep enough to handle it as well as encomium for the head of the central bank of India Raghuram Rajan who foresaw these issues. Sadly, there doesn't seem to be much of a prescription and the financial cushions that thoughtful finance ministers in emerging markets economies have been greatly depleted, leaving many of these countries in a tough spot.
Here are the rest of the big challenges, each getting their own chapter:
Issue 2: Unemployment remains too high in far too many advanced countries; and it is getting more deeply embedded in the structure of these economies and, therefore, will become that much harder to solve
While the US has done better than Europe, protracted unemployment – especially in youths – strains social safety nets, risks damaging the prospects and productivity of an entire generation of workers, will make it harder for countries and people to pay down their debts and on and on. A vicious circle.
Issue 3: Fueled by an unusual combination of cyclical, secular, and structural factors, the worsening of income and wealth inequality has been so pronounced within countries that it now also undermines opportunities
Inequality of income, wealth and opportunity are increasing and there are secular, structural and cyclical factors at play. Structural factors refer to the way the nature of the economy is changing to favor high-skill individuals and "winner-take-all" effects as well as a political system favoring the wealthy (a notion that he does not back up – I'd read something lately that showed that policies that the wealthy alone favored were no more likely to be enacted than policies the middle class alone favored, for example). Inequality creates feedback loops to political power as well and savers have been and will continue to be adversely affected while governments reap the benefits of recent low interest rates.
Issue 4: The loss of institutional credibility is part of a more generalized erosion of trust in politicians and the "system" as a whole
Bernie and Trump. Audit the Fed movement. Euroskepticism.
Issue 5: National political dysfunction is still a headwind to overcoming economic malaise and restoring genuine and durable financial stability
Issue 6: As national dysfunction undermines global policy coordination, traditional core/periphery relations fail and geopolitical tensions escalate
Emerging markets countries are seeking to go around the institutions owned by developed markets countries (e.g., AIIB)
Issue 7: With systemic risks migrating from banks to nonbanks, and morphing in the process, regulators are again challenged to get ahead of future problems
The banking system will be continually de-risked and scaled down in the future. As such, we're seeing risk migrate to asset managers (ETFs) and P2P lenders. Stamp out risk in one part of the market and it will tend to re-emerge in a less well-regulated part of the market. Regulators will struggle to keep on top of this.
Issue 8: When the market paradigm changes, as it inevitably will, the desire to reposition portfolios will far exceed what the system can accommodate in an orderly fashion
Broker-dealers are getting squeezed by regulation but end-users are getting larger and more complex. Two things make this a real problem: 1. Only broker-dealers have access to emergency funding from central banks 2. While some have attempted to build new pipes to directly link end-users, these are not all that successful because the end-users don't like to play nice with their own competitors. Systemic risk increases.
This issue, from where I sit, is the scariest.
Issue 9: Yet none of these uncertainties and fluidities seemed to disturb financial markets that, operating with unusually low volatility went from one record to another. As such, the contrasting gap between financial risk taking (high) and economic risk taking (low) has never been so wide
Investors are too dependent on central banks and expect them to keep volatility restrained. This makes the potential for a major dislocation to be even more painful.
Issue 10: All of this adds up to considerable headwinds for the better-managed part of national, regional, and global systems
It's hard to be the only good house in a bad neighborhood. Balance sheet recessions mean that there are very few economic risk takers (i.e., corporations willing to invest in new people and machines) while there are a much larger number of financial risk takers. El-Erian doesn't say so explicitly, but I'd imagine that demographics would drive a lot of this. As boomers retire they will pour more money into stocks and bonds so that they can earn income in retirement. Since returns are lower for all assets, they will need to find more places to park this money.
Part IV, The Desirable Way Forward, is where El-Erian gives his policy recommendations. First, he says we need to get serious about inclusive economic growth. This is a bit vague, but he basically calls for bold experimentation by governments, structural reforms and a willingness to tackle the sources of unequal economic growth. Second, he says governments need to start spending on sound infrastructure projects (not simply bury money), to be matched with closing tax loopholes (e.g., carried interest). Third, he says we need to remove the debt overhangs. This is the most controversial part of this section. El-Erian basically calls for debt forgiveness. He acknowledges that economic growth, historic low interest rates and better debt terms are also going to be needed, but the crux of it is that he feels we need to just write-down the really bad debts (e.g., Greece). He draws parallels with the Latin American debt troubles of the 80s/90s and the Brady plan. This is the second time I've heard such high praise for the work that the Volker Fed did in handling the Latin American debt crisis.
Part V, El-Erian, having laid his cards on the table, talks about what he thinks is more likely to happen.
I did not care for this book. For context, I don't read much history so part of my agitation may stem from a generally lack of familiarity with the geI did not care for this book. For context, I don't read much history so part of my agitation may stem from a generally lack of familiarity with the genre. Also, I found the book so awful after the first 100 pages that I skimmed most of the rest, cherry picking chapters I thought might hold my interest better. It didn't help.
That disclosure out of the way, I disliked this book mainly because I felt like it was trying to do too much. There were many times I felt like I was being inundated with unimportant details on one page while on the next I wasn't getting enough. The book is heavy on descriptions of the personalities of political operatives, something I'd thought had gone out of style. Also, given the author is an economic historian I expected more in the way of detailed economic analyses using more than words. Charts and tables felt like afterthoughts and were sometimes presented without enough context or explanation.
I can't knock the scholarship but I didn't enjoy this book or feel like I learned much from it....more
This is a delightful little book. I'm not super savvy on a lot of organizational and cleaning stuff, but this book popped up in multiple places in myThis is a delightful little book. I'm not super savvy on a lot of organizational and cleaning stuff, but this book popped up in multiple places in my RSS and podcast feeds with people endorsing it so I gave it a shot. There are a lot of good tips in here couched between Kondo's near-constant self-promotion (which I didn't mind, particularly, but I did skim a lot). TL;DRs here and here. I do feel inspired to declutter my own spaces and I'm optimistic that it will go well.
She's a little nutty at parts (e.g., anthropomorphizing her things, claiming her things can speak back to her) and from the outset a book like this can seem overwhelmingly materialistic but I was heartened by her true message that all these techniques for organizing and tidying are really about 1) appreciating what we own 2) not using things we own as surrogates for other things we may be missing in our lives 3) not letting the things we own own us. It's actually an anti-materialistic book in a very profound way....more